WESCO International Inc. (WCC, Financial) rallied nearly 9% on Thursday. The Pittsburgh-based electrical component distributor announced its second-quarter results before the market opened, beating analysts' expectations on revenue and earnings.
Shares of Wesco have gained more than 200% since bottoming in March, but are still down more than 19% this year. The company managed to tie up a merger with Anixter toward the end of the quarter, which management said was an exceptional achievement considering the circumstances.
"Against the challenges imposed by the global pandemic, the extraordinary determination of our Wesco and Anixter associates to execute a flawless day one closing, just five months after signing the merger agreement, was impressive," CEO John J. Engel said in a statement.
Highlights from the recent quarter
Wesco posted earnings of $1.04 per share on $2.1 billion in revenue. This was better than the consensus analyst estimate of 66 cents per share and a top line of $1.9 billion. Net sales fell 2.9% compared to the same period last year, while organic sales slumped 12.3%. The difference in decline rates was attributed to a positive impact of about 10.3% from the Anixter merger, which concluded on June 22.
Wesco has a $68 million cost synergy target for the first year of operation following the merger.Engel said that in the last six weeks, the company has already completed actions that will deliver about 50% of the targeted synergy savings.
The company had $141.9 million in free cash flow as of June 30, which represents 248% of adjusted net income.
Net sales for the six-month period came in at $4.1 billion, representing a net decline of 1.4% from the same period last year. Organic sales fell by 7.3%.
The industrial products distributor is expected to experience some performance shocks as it continues to integrate Anixter into its business model. However, Engel pointed out positive developments that could help the company to cut costs, indicating the integration could be smoother than expected.
Valuation
From a valuation perspective, shares of Wesco currently trade at a trailing 12-month price-earnings ratio of 9.5. In comparison, one of the company's close peers, W. W. Grainger Inc. (GWW, Financial) trades at a price-earnings ratio of 30.54. On the other hand, Fastenal Co. (FAST, Financial), which offers similar products and services, trades at a price-earnings ratio of 33. Fastenal has gained more than 10% since it reported its most recent quarterly results last month.
When we factor in the earnings forecast for the next five years, Wesco still appears competitively priced with a PEG ratio of 1.08 versus Grainger's 3.85 and Fastenal's 3.35.
In summary, the stock has more than doubled since March. However, it still trades nearly 20% lower year to date, which means there could be some room to run.
The company's valuation multiples also support a bullish case. With the integration of Anixter still in the early stages, however, there could be some shocks along the way, which could affect the value of Wesco's stock.
Disclosure: No positions in stocks mentioned.
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